We hope you and your families are safe and well.
We do not wish to communicate too often. There is already an almighty flow of articles, papers, updates, podcasts, tweets and so on. However we also would like to reassure you that we are working as close to normally as we can. The technology is working well most of the time.
Our job is to plan but more specifically to help clients arrange their affairs in such a way as to be as confident about their plans as possible. Investment theory and practice is a part of this certainly, but not all of it. One of our core beliefs is that the greatest investment wisdom is generally available from academic study and institutions. Nothing that has happened in the last four weeks has changed that belief. We remain in regular touch with the individuals and organisations which have the best long term credentials in investment theory and practice
What follows are a few observations about recent events. Our key messages are
- Selling equities at the current moment implies an ability to time markets. Timing markets is not possible
- If you have any queries at all, on anything, please contact us
Volatility remains with us at levels we have not seen for over a decade. In the past when equities have been volatile, long term investors have sought and ultimately received a premium return in exchange for investing in equities. A few have asked me whether we are at the bottom? We have no idea and nor does anyone else. In terms of historic equity declines what has so far passed is not at all unusual. Fifty percent drops (in real terms) are not unusual. We have had two already this century (the tech wreck of early 2000s and the credit crisis of 2007/8)
Economists seem unusually united in predicting a very harsh recession. Stock markets do not closely match or track recessions. Stock markets are forward looking – they are at a basic level a mechanism for discounting future cash flows from businesses.
The last week has seen some interesting debates and actions on dividends. Dividends are a key component of stock market returns. Some of the most stalwart dividend payers are likely to suspend dividend payments – both banks and miners, but for very different reasons. UK banks have effectively been ordered by their regulators to stop paying dividends, even dividends already declared but not paid. [Solicitor clients – how does that work?] This is partly to ensure that the banks financial strength is not unnecessarily weakened but also because it is probably insensitive to the great many individuals and businesses who view banks in a poor light, the extractive industries are not paying dividends for different reasons, predominantly to do with demand and oil prices collapsing.
We think we need to be careful about state regulation of dividends. Politically it is easy to make the case for suspension. But as ever, things are not black and white. The great bulk of those employed, self-employed or receiving a final salary pension scheme [state final salary schemes aside] are investors in Barclays and Tesco too. Suspending dividends, at least in the short term, does not help those pension schemes. Or old fashioned income investors
And so to portfolios. We have a great many clients (just over 50%) that depend on regular payments from their portfolios to fund their essential and discretionary expenditure. Each client is different but generally clients have cash resources outside of their portfolios but also have short dated bonds and index linked gilts in their portfolios. The short dated bonds are dull investments and have been criticised in the past. These circumstances are part of the reason we still recommend these dull investments. If you require £x per month from your portfolio the last thing you should be doing now is selling equities. (And no that is not a covert buy signal). We will encourage clients to draw from their corporate bond holdings to fund expenditure – this means sticking with the plan.
Finally a short paragraph on global diversification. We along with many others have been looking at previous market declines, including the Great Depression, to see whether we can glean any useful insights. We have examined a lot of stock market falls but these tend to reference global indices or large national indices. Some individual equities have fallen off a cliff (non-food retailers for example), but we see from other periods of great disruption that entire country specific markets sometimes perform far worse than average. In the 1970s recession the big loser relative to the global market, was the UK. We strongly advise you to stay diversified. I will write more on this in a future post.
For now, thank you all for the many discussions you have had with us. Let’s hope for more testing, staying safe and cheering on our extraordinary NHS workers.
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Errors and omissions excepted.